U.S. Equity Markets finished Tuesday led again by the 1.02% fall in the NASDAQ 100. Interestingly, the VIX also fell, closing lower by 0.50%. Markets ended the day mostly lower. Investors reacted to the resilient Job Openings data that increased concern that the Federal Reserve’s intent on slowing the labour market through monetary-policy spells continued aggressive rate hikes. Investors’ overwhelming expectation is for a fourth-consecutive rate hike of 75-basis points this evening. October’s ISM Manufacturing Index slowed but not as much as expected. The employment component improved but there was also some focus on prices paid dropping into contraction. A busy week continues with economic data, the Fed’s policy meeting, and more third quarter earnings reports. The U.S. economy is suddenly flashing red warning signs. Since the first interest-rate hike in March, Federal Reserve Chairman Jerome Powell has said that policymakers have one mission-. to kill economic output and bring balance back into the supply and demand picture. After all, COVID-19-related lockdowns and tons of government stimulus threw the entire equation out of whack. Since countries closed their borders to foreigners, entire businesses operated remotely, and people mostly stayed home, households saw their savings rise. In April 2020, the domestic savings rate as a percentage of disposable income jumped to 33.8% – the highest level on record going back to 1959. But there was a problem, all of those people with newfound money were letting it burn a hole in their pockets. They may not have been able to travel or dine out, but they were going to spend that money somehow. So, they bought things like patio furniture and iPhones and even renovated their homes. While at first, that was a tailwind for economic activity, it soon became a problem. Inventories were not ready for overwhelming demand. As soon as the supply of items like raw materials began to dwindle, prices shot up. Suddenly, inflation was everywhere. The Fed saw one way to fix the problem… raise interest rates. And it has seen few signs of those rate hikes materialising – until recently. Today, the data is finally telling us that activity is slowing, which should help cool inflation, giving the Fed room to ease up on its rate-hike path. The change should bode well for the S&P 500 Index’s long-term outlook. But don’t take my word for it – look at what the data is showing us. Every month, the regional Federal Reserve banks gauge business activity within their districts. Their research teams send surveys to manufacturing executives in their areas, asking them about current business and what the state of activity might be six months down the road. I focused on four key surveys, combining the data from the Dallas, Kansas City, New York, and Philadelphia Feds’ surveys. All of their numbers go back to at least June of 2004. These figures are important when we consider the scope of each of those regions as it relates to the national economy. According to the U.S. Bureau of Economic Analysis, Texas accounts for 9.4% of domestic economic output, New York makes up 7.7%, Pennsylvania is 3.7%, and Kansas is 0.8%. In other words, they make up about 22% of U.S. Gross Domestic Product. That means trends in those Fed districts have more of an effect on what’s taking place nationally. For October, the overall survey readings were negative for each district for the first time since May 2020. The implication is that economic activity in general is contracting. But we want to watch the overall direction of prices as it relates to cost growth for producers and consumers of goods. After all, the path of cost growth shows us the potential for outsized Fed rate hikes of 0.75% or a more gradual 0.25%. And those trends point to slowing inflation. Prices paid is important because it tells us what manufacturers are paying to produce their goods, so, we can compare it with the U.S. Bureau of Labour Statistics’ Producer Price Index (“PPI”). Prices received is equally important. This measure tells us what companies are collecting for their finished goods – or basically, what it’s costing individuals to buy something. We can compare it with the U.S. Bureau of Labour Statistics’ Consumer Price Index (“CPI”). The October reading points toward further weakness in the CPI. The readings for prices paid and received tend to peak before or right around the same time as the PPI and CPI, respectively. They are returning back toward pre-pandemic levels as activity subsides. As I said at the start, Powell has told us the Fed wants to kill economic demand to try and bring cost growth back under control. Ultimately, the central bank wants to get that number back below its 2% target on a sustainable basis. And until now, that has proven to be an elusive task. But like the third-quarter economic output data I highlighted yesterday , signs are starting to materialise that these plans are working. When the central bank has achieved its objectives, it can pause the rate-hike cycle and watch for signs of stabilisation. Once that has happened, policymakers can lower interest rates once more. These results are not going to make the Fed change its mind tomorrow. It will most likely be moving forward with a 0.75% interest-rate hike. But the data factor in the decisions of policymakers and their districts. These numbers may give the central bank a reason to think harder about the direction going forward. Sooner Money managers get a sense that we are at peak interest rates, the sooner they will become more optimistic about risk assets like stocks. They will rush to lock in attractive yields on high-quality assets, like U.S. Treasurys before it’s too late. Then, those same Money managers will work their way down the investment food chain, looking for other opportunities and attractive returns. This in turn will support a longer-term rally in the S&P 500. Within the S&P 500 Index, six of the 11 sectors finished lower. European Markets closed higher. Markets ended largely higher as investors look ahead to tomorrow’s Fed meeting. The European Central Bank President Christine Lagarde said that its terminal rate guidance must ensure inflation returns to its 2% target. Ahead of Thursday’s Bank of England rate-policy decision, the U.K. Treasury has sent a strong signal on tax hikes and spending cuts to stabilize the fiscal position… easing pressure on the central bank. Data coming out of the U.K. show that a correction in the housing market has already started, and the U.K. Manufacturing Purchasing Managers’ Index fell from the prior month. The Bank of England will conduct its first gilt sale this week, becoming the first central bank to take quantitative easing actions. In Asia, Markets ended largely higher with growth stocks surging. The Yuan strengthened on unconfirmed (but later refuted) social media reports that Beijing was forming a committee to assess scenarios on how to exit zero-COVID. The Reserve Bank of Australia raised rates by 25-basis points as expected and guided for further rate hikes. South Korea’s exports fell for the first time in two years as poor global demand amid high inflation and economic conditions impact the nation’s trading. Finally Hong Kong’s Third-Quarter Gross Domestic Product contracted significantly further than expected. Elsewhere, Oil rose 2.16%, while despite a stronger Dollar, Gold ended yesterday’s session with a gain of 0.57%
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Equities
The S&P 500 closed 0.41% lower at a price of 3856.
The Dow Jones Industrial Average closed 79 points lower for a 0.24% loss at a price of 32,653.
The NASDAQ 100 closed 1.02% lower at a price of 11,288.
The Stoxx Europe 600 Index closed 0.53% higher.
Yesterday, the MSCI Asia Pacific Index rose 1.1%.
Yesterday, the Nikkei closed 0.33% higher at a price of 27,678.
Currencies
The Bloomberg Dollar Spot Index closed 0.1% higher.
The Euro closed 0.1% lower at $0.9872.
The British Pound closed 0.2% higher at 1.1481.
The Japanese Yen rose 0.4% closing at $148.20.
Bonds
Germany’s 10-year yield closed 1 basis points lower at 2.13%.
Britain’s 10-year yield closed 5 basis points lower at 3.46%.
US 10 Year Treasury closed 1 basis points higher at 4.06%.
Commodities
West Texas Intermediate crude closed 2.16% higher at $89.35 a barrel.
Gold closed 0.51% higher at $1647.10 an ounce.
This morning on the Economic Front we have the German Trade Balance and the Unemployment Rate at 7.00 am and 8.55 am respectively. Next, we have Euro-Zone Manufacturing PMI at 9.00 am. This is followed by U.S. MBA Mortgage Applications at 11.00 am. Finally, we have the FOMC Statement at 6.00 pm and Powell’s press Conference at 6.30 pm.
Cash S&P 500
Rumours that China may start a committee to decide how and when to end COVID sent Global markets higher yesterday morning while Bond Yields fell. However, the move below 4% in 10-Year Treasuries did not last and once Bonds and the Dollar reversed, the S&P fell 70 Handles. All eyes are on the Fed at 6.00 pm. What if the Fed only raise rates by 50 basis points like the Bank of Canada last week? This would be a surprise and will initially drive markets higher ahead of Powell’s press conference. While I do not think this will happen, one thing for certain is 75 bps is priced in. Personally, I am looking for higher prices to be able to put on a more macro short position. Yesterday, after the S&P hit my 3912 sell level we quickly traded lower to my 3892 T/P level. The sell-off accelerated, trading the whole of my buy range for a now 3865 average long position. I will leave my 3819 ‘’Closing Stop’’ unchanged, while lowering my T/P level to 3880. I will still be a seller on any further rally 3930/3950 with a tight 3961 ‘’Closing Stop’’.
EUR/USD
The Euro fell shy of my .9970 T/P level with a morning high at .9753 before falling 80 points into the New York close. I will add to my existing .9905 long position at .9825 with the same .9755 ‘’Closing Stop’’. I will also lower my T/P level to .9960.
March Dollar Index
My short 111.40 Dollar position worked well as the market traded lower to my 110.80 T/P level and I am now flat. As I go to press the Dollar is trading higher at 111.45. We have resistance from 112.00/112.80 where I will again be a seller with a 113.45 stop.
Cash DAX
I am still flat as the DAX traded in a narrow range yesterday as it continues to consolidate Friday’s massive gains. The DAX has support from 12040/12120. I will continue to be a small buyer in this area with the same 11985 ‘’Closing Stop’’.
Cash FTSE
Lower Gilt Yields continue to support the UK Equity Markets. I am still flat as the FTSE continues to trade over 150 points higher from where I marked prices last Friday. I will leave my 6960/7040 buy level unchanged with the same 6895 ‘’Closing Stop’’.
Dow Rolling Contract
The volatility in the Dow has been insane so far this year. There have been 34 trading sessions when the Dow has surged by more than 400 points. This only happens in bear markets. On top of this the Dow had its best month in October since 1976. Despite the 34 plus 400-point spikes, the Dow has still fallen over 4000 points this year. The McClellan Oscillator closed last night at +252. I am still flat as I continue to be a strong buyer from 32100/32350 with a now lower 31885 ‘’Closing Stop’’. Ahead of the FOMC Statement, I do not want to be short the market.
Cash NASDAQ 100
The two-way price action in 10-year Treasuries resulted in lots of volatility for the NDX yesterday. Tech again led the decline as the market closed lower by 1%. This move lower saw my 11320-buy level triggered. I am still long and I will add to this position at 11180 with a now lower 11045 ‘’Closing Stop’’.
December BUND
No Change. I am still a buyer from 137.10/137.80 with the same 136.55 ‘’Closing Stop’’.
Gold Rolling Contract
Buying the dip in Gold again was rewarded as the market rallied to my 1647 T/P level on Friday’s 1639 long position and I am now flat. Gold has support from 1610/1625 where I will be an aggressive buyer with a 1599 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 20.05 the same 20.60 T/P level.
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